Retirement has been happening later for Americans, and that trend is likely to continue. The average retirement age is 61, up from 57 in the 1990s. But the full retirement age (when you can get full Social Security benefits) is 67 for those born in 1960 or later.
While some people are fine with retiring on the typical timeline, not everyone wants to wait that long. In fact, there’s a movement called FIRE, short for “financial independence, retire early.” Members aim to reduce their expenses, earn more, and invest heavily with the goal of retiring at a younger age — normally 50 or younger.
The methods people use can get pretty extreme. Some have gone as far as living in a van to save more. But there are plenty of easier money moves that can get you on the path for early retirement.
1. Start saving more — aim for at least 30% of your income
Achieving early retirement isn’t that complicated. It’s ultimately about your savings rate, which is the percentage of your income that you save and invest. When you save more, that speeds up how soon you can retire.
A popular rule is to save at least 20% of your income and divide it between your savings account and investments. But that’s for retiring on a normal timeline. For early retirement, you’ll need to save much more. While the exact amount depends on your age and when you want to retire, you’ll likely need a savings rate of at least 30%.
You may not be able to reach that level right away, and that’s fine. Start with what works for you. If you can bump up your savings rate by 1% or 2% of your income this year, do that, and continue raising it whenever you’re able.
2. Invest with retirement and non-retirement accounts
It’s widely recommended to invest for retirement with retirement accounts, because they help you save money on taxes. If your employer offers a 401(k) plan, you can contribute to that with pre-tax income. Many employers also offer a 401(k) match, where they match your contributions up to a certain limit.
You can also open individual retirement accounts (IRAs) on your own. Contributions to these are tax-deductible. And there are Roth IRAs, where contributions aren’t tax-deductible, but your withdrawals in retirement are tax-free.
However, these all have a key drawback: An early withdrawal penalty if you take out money before age 59 1/2. While you should use retirement accounts to save on taxes, make sure you also invest through a regular brokerage account. This type of account doesn’t have tax benefits, but you can withdraw from it at any time.
3. Find a way to increase your income
There’s a popular expression that “it’s not what you earn, but what you save.” That’s not entirely accurate. It’s what you earn and what you save.
It’s challenging to cover all your bills, spend money on things you enjoy, and save enough for early retirement. Although you don’t need a massive salary to retire early, a higher income helps. You’ll be able to save more earning $80,000 per year than $40,000.
Think about what steps you can take to increase your income this year. It could be as simple as talking to your manager at work about a raise. A promotion or a new job are other options. If you’re a freelancer or a small business owner, you could look for ways to improve efficiency or land higher-paying clients.
4. Look for a few areas where you can spend less
Spending less is a good way to increase your savings rate, provided you don’t overdo it. If you try to cut back on everything, you might make yourself miserable. These kinds of drastic changes are also difficult to maintain.
Don’t try to spend less on everything, or in areas that are important to you. Instead, look for expenses you can reduce without affecting your quality of life.
Maybe you’ve been spending a lot of money on a big apartment, but you realize you’d be just as happy in something smaller. Or you’ve found that having a nice car isn’t worth an expensive monthly payment to you. Go over your expenses to decide what’s worth paying a premium for and where you’re not getting much bang for your buck.
5. Resist lifestyle creep
One of the biggest benefits of working toward early retirement is it puts you in a much better financial position. Earning more income, saving more, and investing are all fantastic ways to improve your finances.
But there’s also a potential downside. When you’re earning and saving more, it’s tempting to start spending more, too. You may see what you have in the bank and decide you should treat yourself to nicer clothes, five-star hotels for every vacation, and so on.
There’s nothing wrong with spending more to improve your quality of life. Just be careful about how much you spend, and make sure your spending fits with your retirement goals.
You don’t have to retire at the same age as everyone else. If you’re interested in retiring early, the methods above can help you make it happen.
